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By Chris Bailey of Financial Orbit | Tuesday 13 June 2017
Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
I last mused about industrial plant and tool hire company Ashtead (AHT) fourteen months ago, since when the shares have basically doubled. Happy days...but no resting on the laurels because correctly you should be asking the question of 'so what do we do right here and right now?' Fortunately, the company puckered up its full year results today so all the latest information is to hand.
Being a grimy industrial rental business dominated in profit and revenue terms by its Sunbelt US business rather than its A-Plant UK division, Ashtead has rather crept into the FTSE-100 but it more than justifies its place. Helped by continuing evidence that the average building, constructions and industrial company in both the US as well as the UK prefers to hire rather than buy required kit, Ashtead continue to throw out higher profits (up 7% in the year to the end of April) and, more impressively, despite a big capex boost in new kit and systems, free cash flow generation turned positive and easily covering the dividend (on which it just announced a 22% hike pushing the yield to a little over 1.5%).
Higher profits and cash flow are always good, but what continues to strike me about this business is that the strategy is caught in a deep and compelling virtuous circle. Keeping the capex levels up compared to peers takes the edge off the short-term numbers but, as the travails of names like HSS Hire (HSS) since its disastrous floatation have shown, if you fail to keep up your reinvestment in new kit for a rental business ultimately the wheels fall off. Other peers in the US also periodically make this mistake and hence the Ashtead Sunbelt business continues to pick up market share (currently estimated at a national level by the company to be around 7%, from just 4% back in 2010) with clear scope to add more.
The company also found time to talk positively about the current economic set-up with the observation that 'the markets are strong...I cannot tell you how hard it is to get drivers'. Perhaps President Trump should get the company's CEO on one of his business leader forums given the positive comments made on any infrastructure plan roll-out (if it ever happens)...although I assume that the Federal Reserve's much-anticipated next interest rate hike is now even more odds on than it was before.
Not that Ashtead at this moment in time cares, with its own debt levels under control and if it keeps on throwing off cash as it has done in the last year it is building up to a high quality 'too much cash on the balance sheet' problem.
And the shares are not classically expensive trading at under 12 times EV/ebit on the full year numbers just released and obviously a lower multiple for 2018 as the company is happy with continued progress.
So forget the doubling in the last fourteen months and buy? Compared to much of the other overvalued rubbish in markets today, Ashtead is a quality counter but the way it works with industrial cyclical names is that at the first whiff of a clear and sustained slowdown, the share cumulatively falls 20% over a six or nine month period without thinking about it twice.
Now a US slowdown is not what the company is seeing at the moment and the theme remains strong so my advice is to play the angles. If you have held it for a while feel free to take some profits. If you don't hold it then no need to pile into such a love-up. Wait for a bad day below that 1600p support level.
In short: great theme/company but choose your spots. There is precious little you HAVE TO BUY right here, right now.
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